In Tight Credit Market, A Tool For Small Businesses

Many small-business owners have had difficulty securing loans in recent years. One website grades the nation's banks by the ratio of small-business loans to deposits — and finds that community banks are often most friendly to small business.

Seth PerlmanAP

Listen

Listening...

/

Originally published on May 25, 2012 9:09 am

When small-business owners start looking for money to expand, they often begin at a big bank. The banks are highly visible, well-known and often nearby.

But many small-business owners report that they have struggled to get loans in the wake of the economic downturn.

Ami Kassar, CEO of the small-business-loan broker multifunding.com, advises business owners that large banks are "not the best place to start" when looking for a small-business loan.

Kassar has created bankinggrades.com, a website that gives every FDIC-insured bank in the nation a grade based on how many small-business loans it makes. He used data from the Federal Deposit Insurance Corp. to create the site, designed to help small-business owners find the best loan.

Turned Down Cold

Patricia and Jim McGrath own Branches Atelier, a preschool in Santa Monica, Calif. Their existing space had grown too small and they wanted to expand. Late last year they found the perfect site, but they needed a loan to buy the building.

"So we first approached my own bank," Patricia McGrath says. "It's one of the large banks, and I've been banking with them for over 20 years. And it made sense that we would go with people that we knew."

The McGraths thought it would be a relatively simple process. Their business was solid financially, they had money for a down payment and they had always had a long waiting list of prospective students.

Moreover, the mortgage payment on the new building would have been little more than their existing rent.

Even so, the bank — one of the nation's very largest — turned them down cold.

"I was shocked. We have excellent credit, and we have money in the bank," Patricia McGrath says. "I couldn't understand why they wouldn't be willing to give us a loan. It didn't make any sense to me."

Big banks "are able to go out and lend hundreds of millions of dollars here and there," Kassar says. "For them, these little loans are a pain."

He says many small-business owners may have better luck with smaller banks.

"In comparison, for smaller banks, the community banks, their business is small-business lending," Kassar says. "And that's the best choice, in our opinion, for small business to go to get a loan."

Very small loans don't produce much profit for big banks. But community banks typically have a mission beyond making money. Many want to help build and enhance their communities — and many of those institutions top the Banking Grades list.

Bigger Banks Wary

Banking Grades rates banks based on the ratio of business loans of $1 million or less to total domestic deposits.

The Financial Services Roundtable, which represents big banks, quarrels with the metric. The group argues that the measure doesn't consider all factors. It also cites efforts by large banks to increase their small-business lending.

But Keith Weigelt, a small-business-finance expert with the Wharton School of Business, says Banking Grades can be a valuable tool for small-business owners.

"If I was a small business, I would welcome that," Weigelt says. "First of all, it would save me an awful lot of time in terms of search costs."

Indeed, the McGraths say they spent an incredible amount of time and energy trying to secure the loan for their preschool. In addition to being turned down by their giant bank, they were strung along — and then rejected — by a midsized one.

Finally, the couple turned to a community bank, Orange County-based Plaza Bank.

That's where they found a banker who wanted to give them a loan — and then did.

"Ultimately, if you don't get the right bank — no matter how good you look on paper — you're not going to be able to move forward with your business," Patricia McGrath says. "And that's really unfortunate."

The McGraths are nearly done painting their new building, and they're working on a new play structure and a garden.

They are also hiring — adding about a half-dozen full-time jobs.

Copyright 2012 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, HOST:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

Ever since the financial crisis began, many small businesses have struggled to get loans. One businessman in Philadelphia has a plan to help by adding some transparency to the process. He's created a website that gives every FDIC insured bank in the country a grade based on how many small businesses it loans to. NPR's Wendy Kaufman reports.

WENDY KAUFMAN, BYLINE: When small business owners start looking for money to expand, they often begin at a big bank. Those banks are highly visible and often nearby. But, says Ami Kassar...

AMI KASSAR: Certainly in my mind, and the data shows it - not the best place to start.

KAUFMAN: Kassar is the CEO of MultiFunding.com - a small business loan broker. Kassar used data from the Federal Deposit Insurance Corporation to create a website called Banking Grades. It's designed to help small business owners like and Jim and Patricia McGrath find the best loan.

The McGraths are the owners of Branches Atelier, a preschool in Santa Monica, California.

(SOUNDBITE OF CLAPPING)

GROUP: (Singing) Welcome, welcome to our circle. Welcome, welcome...

KAUFMAN: Just a dozen children fit comfortably in the current space, and the McGrath's wanted to expand. Late last year, they found the perfect site, but they needed a loan to buy the building.

PATRICIA MCGRATH: So we first approached my own bank. It's one of the large banks. And I've been banking with them for over 20 years, and it made sense that we would go with people that we knew.

KAUFMAN: They thought it would be simple - financially their business was solid, they had money for a down payment, and they'd always had a long waiting list of prospective students. Moreover, the mortgage payment on the new building wouldn't have been that much more than their rent. Still, the bank - one of the nation's very largest - turned them down cold.

MCGRATH: I was shocked. We have excellent credit, and we have money in the bank. I couldn't understand why they wouldn't be willing to give us a loan. It didn't make any sense to me.

KASSAR: Big banks, you know, they're able to go out and lend, you know, hundreds of million dollars here and there.

KAUFMAN: Again, Ami Kassar...

KASSAR: For them, these little loans are a pain. In comparison, for the smaller banks, the community banks, their business is small business lending. And that's the best choice in our opinion for small business to go to, to get a loan.

KAUFMAN: Very small loans don't produce much profit for big banks, but community banks typically have a mission beyond making money - many want to help build and enhance their communities. So it's not surprising those institutions top the banking grades list.

The metric here is the ratio of business loans of a million dollars or less compared with total domestic deposits. It's a metric the Financial Services Roundtable, which represents big banks, quarrels with, saying it doesn't consider all the factors. The group also cites efforts by large banks to increase their small business lending. Keith Weigelt, who teaches at the Wharton School, is an expert in small business finance. Here's his take on the banking grades website.

KEITH WEIGELT: If I was a small business, I would welcome that. First of all, it would save me an awful lot of time in terms of search costs.

KAUFMAN: Indeed, preschool owners Jim and Patricia McGrath say they spent an incredible amount of time and energy trying to get their loan. In addition to being turned down by their giant bank, they were strung along and then rejected by a mid-sized one. Finally they turned to a community bank, Orange County-based Plaza Bank.

MCGRATH: A wonderful bank.

KAUFMAN: There they met a banker who wanted to give them a loan and did.

MCGRATH: Ultimately if you don't get the right bank, no matter how good you look on paper, you're not going to be able to move forward with your business, and that's really unfortunate.

KAUFMAN: The McGraths are just about done painting their new building and they're working on a new play structure and a garden. They're also hiring, adding about half a dozen full time jobs.